ABSTRACT
Willem Buiter has launched two rather forceful attacks at accepted traditions and has taken up the cudgels for demand management to supplement the prevailing supply-side economic policy as the proper policy mix for European economic policy.
Using Barro’s model and drawing on work by Marini, Buiter denies the hypothesis regarding the ineffectiveness of economic policy as put forward by many rational expectations theorists. Instead, he contends that economic policy is effective even if the policy-makers are worse informed than the economic agents in the private sector.
Drawing on work in the fields of asymmetric information and path-dependent economic processes (hysteresis), Buiter argues that conventional demand and supply analysis is completely outdated, as these new theories reveal the mutual dependence of demand and supply forces that cannot be separated.
As to the appropriate economic policy for Europe, Buiter rejects the laissez-faire solution as well as a purely supply-side oriented economic policy to remedy the present high unemployment in Europe. Instead he recommends as the third way “a significant, sustained, supply-side-friendly, co-ordinated expansion of aggregate demand through monetary and fiscal stimuli” (p. 334).
My comment follows this structure of Buiter’s paper. I shall first deal with the two attacks and then with Willem Buiter’s recommended economic policy that should be pursued for Europe.